NAEPnet

www.NAEPnet.org

Brian YeomanDirector Sustainable Leadership

NAEP

Facilities InstituteJuly 9 - 12, 2012Houston, Texas

Energy Performance Contracting

ECM - Energy Conservation Measure EE - Energy Efficiency EPC - Energy Performance ContractFI - Financial InstitutionFIM – Facilities Improvement MeasureESCO - Energy Services CompanyGHG - Greenhouse Gas EmissionsIGA - Investment Grade [energy] AuditMUSH – Municipal University State and Hospitals

Acronyms



Why Performance Contracting?

• Opportunity: Buildings generally account for 40% of emissions and up to 70% in big cities

• Lifecycle cost: 3/4 of costs of buildings occur after construction is complete

• History:Excess energy and savings are trapped in existing buildings based upon project executions



One solution yielding multiple benefits

• Wasted energy is wasted money

• Improve the organization’s finances

• Improve occupant comfort and productivity

• Retain wealth in the community

• Improve the value of the real estate asset

• Improve image with real contributions to the environment

• And, yes, reduce GHG emissions



Overview

• A turnkey contracting method through Energy Service Companies (ESCO)(

• Includes an energy audit, a proposal of energy conservation measures (ECMs), design, construction, project management, commissioning and performance measurement

• One guaranteed fixed price (GMP)• Single provider accountable for all aspects of the

project• Guarantees of energy savings the project will achieve

o ESCO pays the difference for unrealized amount*



An innovative model

• Utilizes energy savings to provide debt service payments

• Alternative financing to making expenditures from a capital budget

• Performance assured for life of agreement, e.g. up to 20 years

• Measurement and Verification of Results

• Guaranteed Maximum Price (GMP) construction costs

• Large scale projects


Energy

Financing

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Lender

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Sav

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New BillOld Bill

ESCO Debt Payment

Owner

Mental Model for EPC

Some key questions:Where is the deal financed?Who pays the lender?Financing term in years?




Typical Scopes of Work

Direct Energy Focus– Boiler optimization– Chiller plant

optimization– Lighting retrofit– Energy management

systems– Equipment

modernization– Windows and roofs– Laundry– Motor efficiency

Indirect Energy Focus– Utilities procurement– Water conservation– Service contract

consolidation– Staffing– Waste removal– Re-lamping– Sub-metering

BuildingTune-up Lighting Load

Reductions

FanSystem

Heating and Cooling System Upgrade

Source: EPA Energy Star



Overview

• Proven contracting model o Project development costs minimizedo Streamlines procurement processo Transparency and integrity assuredo High confidence of implementation

• Owners control process o Owners specify investment prioritieso Open-book & guaranteed maximum pricing reduce risko Gain sharing reduces project costs, maximizes outcomeso Best evidence e.g. that everything is negotiable



Overview

• Complexo 46 different implementation statutes in the USo Contracts are long, detailed and very pro vendor communityo Securing access to initial capital is typically the biggest hurdleo Should not be undertaken by a novice

• Self-financingo Utilize energy savings to make debt service payments on

project financingo Performance assured for life of agreemento Includes gain sharing and savings guarantee



Overview

• Market size estimated at <$5 billion in the USo Market is largely Municipal, Universities,States and Hospitals (MUSH)o Large opportunities in all

• Public sector has utilized ESCOs the mosto Federal Government the largest playero Most US states have enabling legislationo Tax exempt borrowing increases scope of investmentso K-12 schools, universities, hospitals, and public housing most active

• Projects vary in size, scope and durationo Size: $500 thousand to $30 milliono Duration: 3 to 20+ yearso Building controls, heating, cooling, lighting typical components



Keys to Success

• Alignment of objectives between Owner, Financial institution and ESCO is essential.

• In the traditional Contracting Approach: success is measured by project cost and meeting delivery date

• In the Performance Contract Approach: success is measured by energy savings results and the economic and environmental derivative

• Traditional Low Bid Contractors must cut costs to win a job. Then transfers all of the risk to the owner.

• Performance and code issues become the owner’s responsibility.



Keys to Success

• A Performance Contractor must eliminate the risk of “surprise” costs up front to develop a business proposition the ESCO can guarantee.

• The better the contractor can determine the costs up front-- the lower the risk. The more risk they are willing to take-- the bigger the project. The lower the cost to implement-- the more the ESCO can include.

• The owner passes cost and performance management risk to the ESCO making it a self regulating approach.



What the Owner will need to do • Review capital plans• Define support• Identify energy & deferred maintenance opportunities• Review capital plans• Define support service requirements• Identify opportunities for grants and rebates• Arrange financing• Prepare communications & awareness plan• Finalize contract document• Arrange financing routine service requirements• Identify opportunities for grants and rebates• Prepare communications & awareness plan• Finalize contract documents



Process Flow

• Feasibility Assessmento Low-level audit reviewing twelve months of utility bills and

facility data to determine project potential• Workshop

o Information session to discuss findings of feasibility and possible projects

• Preliminary Audito Selected areas will be more formally audited

• Detailed Audit Contracto Investment grade audit focused on agreed-to parameters

(eg. scope of work, reference criteria, expectations) culminating in a proposal for implementation



Process Flow

• Independent Third party Reviewo Use dissociated professional engineers and Certified

Energy Managers to confirm that the scope is the scope and that the estimates are rationale

• Installation Contracto Final approval of project and any financing requirements

• Performance Assuranceo Monitoring of the system throughout the contract termo Use a widely accepted standard to protect the institution

Procurement Process Overview: How it Works

• Conformance

• Qualitative evaluation

SelectionRFP

• Qualifications• Scope of work• Project pricing• Cost reduction

incentive• Walk-through• “Pre-study” audit

• Energy engineering

• Investment proposal

• Service proposal

Investment Grade Audit

• Loan underwriting

• Equity participation

• Gain sharing

Investment

PerformanceContract

• Qualified measures

• Performance guarantee

• “Walk-away” compensation fee for audit

InitialOwnerCommitment

• Harmonization• Credit check• Investment

criteria• EE/Carbon goals

• Financial stability

• Technical expertise

• Resource mobilization

• Testimonials from previous clients

ESCO Pre-qualification

Initial Owner Commitment

Create a Work team

Work plan

Define Program Criteria

Needs assessment

Technical & operational goals

Financial objectives

Energy efficiency and carbon emission reduction goals

Contractual requirements

Administrative processes

Decision and approval processes



criteria• EE/Carbon goals




criteria







criteria







criteria





• Testimonials from previous clients



criteria




Insist upon Best Practices

Transparent Pricing• Proposer absorbs their sales & marketing costs

• Project budget estimates, ECM’s subject to multiple reviews

• Bracketed negotiation, approval not unreasonably withheld

• Customer can withhold approval for individual ECM’s

• Walk-away fee equal to no more than 250% audit cost pe square foot (prorated)

• Walk-away fees paid by customer, not financed

• Available through The American College and University President’s Climate Challenge (ACUPCC) and the Clinton Foundation



Insist upon Best Practices

Implementation Gain Sharing• On approval, project implementation cost is guaranteed

(GMP)

• On completion, implementation savings is computed in energy units by contract and then by extension dollars

• What is guaranteed is reduced energy units not dollars

• Over realized savings shared

• Implementation savings do not affect performance guarantee

• Operations and Maintenance savings are not typically included

The Solicitation

RFQ or RFP

• Qualifications• Scope of work• Project pricing• Cost reduction

incentive






criteria


ESCO Pre-qualificationESCO Pre-qualification






criteria






Selection and Award

RFQ or RFP

• Qualifications• Scope of work• Transparent

pricing• Cost-reduction

incentive

• Conformance

• Qualitative evaluation

Selection






criteria







criteria




Show me the money!

• Remember that all of the savings dollars are inferred

• It is actual utility savings times your negotiated agreed to rate for each utility unit cost

• That means if in the course of the contract you do not buy the utility right you do not get a windfall savings contractually

• There is an annual reconciliation process and each sub project or tranche has its own reporting year


Energy

Financing

Pe

rfo

rman

ceG

ua

rant

ee

Tu

rnke

y P

roje

ct

Lender

Ene

rgy

Bill

Sav

ings

New BillOld Bill

ESCO Debt Payment

Owner

Mental Model for EPC

Some key questions:Where is the deal financed?Who pays the lender?Financing term in years?

EPC: Cash Flows

EPC: Cash Flows

Customer Savings

energy/operating costs

Paid to debt service for financing

EPC: Cash Flows

Paid to debt service for financing

New, reduced energy/operating costs achieved from EPC improvements



Security in EPC Lending

• Customer’s financial condition drives lending termso Public sector borrowers can “non-appropriate”

o Tax exempt leasing is most commonly used lending vehicle• Value of equipment is not important as collateral

o Essentiality of use is importanto Lenders do not look to equipment as collateral

• Strong performance guarantee minimizes “add-on” capital costs attributable to performance risko Usually no right of set-off (except in federal)o Strong ESCO (operationally and financially) improves credit of

customer



• Project Designo Cash Flow Neutrality (or better)o No Price Changes/Surpriseso Streamlined Process & Timelineo Unambiguous Accountabilityo Appropriate Flexibility in Design & Project Mixo Unambiguous Performance

• Selecting an ESCoo Overall Reputation – These are high-profile, complex

projectso Reliability – This is a long-term partnershipo Relationshipso Value Createdo Value Delivered

Review Key Success Factors



For Owner:• Guaranteed Cash Flows• Guaranteed Maximum Price (GMP)-no change

orders• Guaranteed Results and Performance• Single Source Accountability• Fast Track construction • Appropriate flexibility in design & project mix• Improvements are based on best ‘life cycle cost’ not

lowest bid, resulting in higher efficiency equipment• Owner has input in equipment selection

Review Benefits from EPC


Review It is a true Win – Win !

• Promises deliveredo Reduced Operating Expenseo Upgraded/Renewed Aging Infrastructureo Improved Comfort and Facility Performanceo Reduced Operating and Capital Budgeto Inject money in local businesseso Demonstrates social responsibility

• Building owners SAVE money and energyo ESPC market grows – Banks, ESCOs, Product suppliers increase

business

• Lower GHG emissions

• More jobs



How to Begin?

• Define the Institution’s goals regarding energy performance

o Percent reduction in energy use

o Percent reduction in energy expenditures

o Near-term savings required to provide immediate cash flow improvements?

o Percent reduction in building generated GHG’s

o Determine maximum payback period

o Determine operational constraints

o Do the students need to have uninterrupted classroom experience; i.e., must work be done at nights, on weekends, during holiday periods?

o Historic preservation



Beginning Part II

• Prioritize the goals

o Which are the most critical?

o What is the balance - the point of equilibrium - among competing goals?

• Inventory of all owned buildings

• Understand the energy performance of buildingso Electric, gas and water data

o Per year/per monthper square foot

o Age of buildings

o Age of major equipment in buildings

o Energy control systems in buildings



Beginning Part III

•Develop strategy paper that describes the procurement process

•Who needs to do what at each step of the process

Identify and name a project manager and project team members

•E.g.: the project manager, legal, finance, procurement process expert, operations and maintenance managers, and energy manager




Lessons Learned

• A variety of goals are motivating different building owners

o Climate change mitigation/ACUPCC

o Near-term cash flow improvements, long-term asset value improvement

o Marketing/public image

o Energy efficiency and the green agenda

o Recruitment and Retention



Lessons Learned • Each owner is learning to create a procurement process for

their legal, political, and procedural context

o RFQ or RFP?

o Formal vs. Informal?

o ESCO’s are being flexible

• A variety of financing solutions being explored

o Self-financed

o ESCOs themselves

o Assisted by electric utility

o Exploring tax-exempt public revenue bonds



Thank You !!!

• Questions• Comments• Concerns

Remember that you too can do great things!

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